California Home Builder Adapts to Shifting Market

The good news first.

Irvine, Calif., builder Standard Pacific Corp. still is on track to post its third-most profitable year in the company’s 30-year history, CEO Stephen Scarborough says.

After that, it gets a little tough finding good news.

According to the Orange County Business Journal, the building company reported its third-quarter earnings late last month, amid what it politely described as “challenging market conditions.”
Standard Pacific’s latest results reflected those challenges. Earnings fell to $30.8 million from $96.4 million a year earlier. Analysts were expecting profits of up to $44 million. Earnings were hit by an 18 percent decrease in completed new home sales, including a 7 percent decline in California.

As we’re seeing all over California and throughout the U.S., the shift in home mortgage rates and buying demand is causing heavy changes in home construction. Here are a number of additional eye-opening numbers in the firm’s third-quarter report:

• New home orders, or contracts to buy a Standard Pacific home, were 1,200 in the quarter, a 58 percent decrease from a year ago.
• California housing market conditions are so off in the southern portion of the state that new home orders there were off 72 percent from a year ago, even though Standard Pacific was building at 28 percent more developments than a year ago.
• With California mortgage rates up about a percent from where they were a year ago at the peak of the housing boom, Standard Pacific’s cancellation rate for the third quarter was a stunning 50 percent of orders, compared to 18 percent a year ago.
• On the plus side, there was a 9 percent yearly increase in the company’s average home price, to $368,000. In Southern California, prices increased 16 percent, to $747,000.

Standard Pacific’s main markets — California, Arizona, Texas, Nevada and Florida — are among those seeing the biggest sales declines. It seems the company is feeling the brunt of the changing national housing mood as much as any builder. Analysts say Standard Pacific’s cancellation rate was the biggest of any major builder.

The main reason for the increase is simply that buyers aren’t able to sell their existing homes.

The company is already adapting to a changing market. Expect to see a reduction in Standard Pacific’s land holdings next year, along with more incentives to woo clients and discounts to move homes.

In San Diego County, Carlsbad homes in the $1.2 million to $1.4 million range now are seeing price cuts as much as 20 percent. Less expensive condos at around $500,000 are seeing cuts in the 15 percent range.

The lower prices have helped stabilize the company’s business in Southern California, even if there isn’t much evidence the California housing market is turning around.

“There’s been some pockets of good results” in recent weeks, Scarborough said. “There’s a little (more) optimism.”